Welcome to Eureka Street

back to site

How financial markets are stymying climate action



There is little doubt that the means to dramatically reduce the amount of pollution produced by developed economies is already theoretically available. It is perfectly possible to redesign industrial systems so that they do not pollute and do not consume finite resources at a rate that is unsustainable.

Emissions from power plantBut it requires a radical shift — and the biggest barrier to that shift occurring, the financial markets, is barely even mentioned in discussions of the challenge.

One of the ironies of humanity's post-industrial predicament is that many of the great triumphs of the industrial era, such as centralised power grids, are now the cause of our problems.

Instead, the world is relying on changes to slowly bubble up, and there are signs that a turning point has been reached, especially with fossil fuels. The world's largest coal producer, Peabody, has filed for bankruptcy

Coal fired power plants are increasingly 'out of the money'. China has suspended new coal power plant approvals. Saudi Arabia is planning to sell five per cent of its state oil company Aramco to create a $US2 trillion sovereign wealth fund that can help the country prepare for the post fossil fuel era.

Bloomberg's 2015 New Energy Outlook report forecasts there will be investment of $8 trillion in renewables by 2024. By that date, 60 per cent of world energy will come from zero emission technology (although there will be enough legacy fossil fuel plants and investment in new coal-fired capacity in developing countries to ensure that global carbon dioxide emissions continue rising until 2029).

The likelihood, however, is that much of this adaptation will be too slow to address the systemic challenges. Worse, the politics of environmentalism is too often based on ignorance of how economies and financial markets work.

For example, we do not need less economic growth. Growth is simply the rate of transactions, the movement of money. What is required is less consumption of resources and despoliation of the environment. Transactions can increase without greater consumption or such despoliation occurring.


"There is no prospect that banks will lend for innovative ways of reconfiguring our industrial systems. Indeed, they would laugh at the very idea."


Indeed, that is exactly what is happening. Financial services, for example, create 'economic growth' but they are typically the shifting of minute pieces of data that consume almost no resources.

Another commonly cited solution, that people need to stop having babies, is also false. In fact, that has already occurred and yet we still have growing pollution problems. The global fertility rate has halved from its level in the 1950s: from five to about 2.3. It is projected to be at replacement rate by the middle of the century.

It is also not true that 'market based' solutions, such as Emission Trading Schemes, are the solution. In fact, as demonstrated in Europe, ETSs do not have a good track record in reducing consumption at all.

A fourth commonly cited solution is to appeal for government action. Government fiat can help shape what companies do and prevent some of the worst excesses, but governments in the developed world, even with the best will in the world, simply do not have the money to instigate the kind of changes needed. They are all broke. And the one government that is not broke, China, has disappointingly not been a leader in establishing post-industrial, non-polluting cities, despite having the world's largest pool of highly trained engineers.

What is required is a change to our financial markets. The greatest point of resistance to genuine change is how banks, and to a lesser extent stock markets, allocate capital. As Lord Adair Turner, the former head of the United Kingdom's Financial Services Authority points out, only 15 per cent of bank lending funds new capital and investment. Of that, only a tiny proportion will be directed at the kind of reconfiguring of industrial systems that is required.

The majority of bank lending reinforces the problems of the industrial era. Eighty five per cent is directed at real estate investment and consumption. There is no prospect that banks will lend for innovative ways of reconfiguring our industrial systems. Indeed, they would laugh at the very idea — and then ask for any lending to be secured against land assets.

Neither are big corporations much use. They are increasingly hoarding cash, using it to buy back their own shares. And in any case big businesses are notoriously poor at innovating and changing direction. Once they have developed commercial habits, they remain rusted on, even with the best intentions. Oil companies, for example, may talk about becoming more invested in renewables, but they will inevitably all rise and fall in line with the consumption of oil.

Governments, whether because they were fooled or cynical, have, citing the oxymoron of 'financial de-regulation', ceded power to private banks, almost in totality. Those banks are now acting as parasites on much of the world economy, paralysing the host. And a paralysed host cannot change. If humans are to adapt to the challenges of the post-industrial world, the first place to look is the financial system that they have created, and change what it does.


David JamesDavid James is the managing editor of businessadvantagepng.com

Topic tags: David James, banks, climate change, renewable energy



submit a comment

Existing comments

How can we reconcile the supposed flight from fossil fuels a la Peabody with the fact that "renewables" are now being shunned by Denmark,etc? Perhaps because Peabody , etc, are being crushed by government regulations, but Danish renewables (e.g.) despite massive government subsidies, are proving non-viable? Wake up.

HH | 14 June 2016  

Yes, yes. yes.

Sheelah Egan | 15 June 2016  

Dear David - a timely comment on the need to tackle banks. 3 points: 1 .. 'and change what it does'. I don't see you've given us any leads here. In fact, you seem to have knocked off any avenues for action, eg govs. 2. 'growth' - you present a very narrow version of this: usually it applies to the composite of 'economic growth' factors and that falls down under the many versions of 'you can't have economic growth for ever on a finite planet' (Herman Daly's steady state economics theory, and many others; 3. population growth: en globo numbers are not the only indicators of an over-reeach of population. Think cities: that's where the populations are extending themselves with unfortunate results. Reading carefully the last sentence of para 50 (Laudato Si) leaves no doubt that the letter is aware of this problem: read 'metropolitan regions' for the word 'regions' therein and you'll see where one of the main problems with population growth lies.

Len Puglisi | 15 June 2016  

David James Population Matters has the truth of the population concerns and it's impact on the environment. The patron Sir David Attenborough has recently had an audience with Barack Obama, visited the Great Barrier Reef. Population control has been an issue since 1970. The rate of change and the exponential rate of change itself. The reason for China's one child policy for 30 years. Government officials should be concerned with family size. Women should only have the children that they can afford. The ideal family size is 0-2 children demonstrates a social conscience.

Ann Larson | 15 June 2016  

Within the next 5 years, the world will experience an electricity revolution, as new style home batteries take hold. As reported, one company, Redflow, claims that "its battery storage product, using zinc bromine flow battery technology developed at the University of Queensland, and then later through the company, will allow people to ‘timeshift’ solar power from day to night, store off-peak power for peak demand periods and support off-grid systems. The Australian company is playing hard on its durability, emphasising the fact that ZCell is “warranted to deliver its full 10kWh of stored energy each day for as long as 10 years.” During that period, it says, rival lead acid and lithium batteries can lose a significant portion of their storage capacity. It is also emphasising the fact that the materials in the battery – mostly plastic, aluminium and steel – are easily recycled. Its fluid electrolyte, less environmental benign, can be re-used or repurposed. And there is no risk of explosion or “thermal runaway” that can afflict other products." Home owners should install roof-top solar panels and join this revolution that is inevitable, in spite of our government being highly compromised by huge donations from the fossil fuel industry.

Grant Allen | 16 June 2016  

Thanks; very thought provoking. A mix of government intervention/regulation and proper costing in the market of the risks inherent in production surely has to occur together. The carbon tax should have been extended to include carbon costs in imported goods, but was ruined by Green-Labour over-reach in the charge imposed and then destroyed by dear Tony and the luny rightwing of the Libs. Australia`s democracy at work! But what goes round comes round and eventually human drive for survival will overcome even the stupidity of our politicians.

Eugene | 16 June 2016  

It’s definitely time to question the role of financial markets which hinder the chances of solving our vast problems at every step. However, we must still look closely at growth itself. We are adding c.80 million people annually - the same NUMBER as we were at peak percentage growth in the 1960s. “Replacement” is no panacea as we head towards 10-12 billion people embracing consumer culture. We need to stabilise numbers of people, especially those addicted to consumer culture. Agriculture as practised now is responsible for about 25% of greenhouse gas emissions and all people must eat! Agreed also that the problem is not so much reduced economic growth per se but “less consumption of resources and despoliation of the environment.” I am sceptical, however, that this can be achieved while “reconfiguring our industrial system” and only banks stand in the way. Panels and turbines all take resources and energy. Can they be expanded under a regime of less consumption of resources and despoliation of the environment? - or, more importantly, under a regime of sufficient reduction to avoid the pressing crises of species loss, global warming, nitrogen/ phosphorous pollution and land-use modification (clearing forests/draining wetlands)?

Kerryn Higgs | 28 June 2016